Unit 3: National Income and Price Determination

the inverse relationship between all spending on domestic output and the aggregate price level of that output

the sum of consumption spending by households, investment spending by firms, government purchases of goods and services, and net exports (exports minus imports)

Foreign sector substitution effect, interest rate effect, and wealth effect

when goods and services produced in other nations are more appealing due to domestic inflation → brings real GDP down

wait-and-see mentality for goods and services in the future as prices rise and real GDP falls

as aggregate price level rises, the purchasing power of wealth decreases → reduce quantity of domestic output purchased

the value of accumulated assets like stocks, bonds, savings, and cash on hand

a downward sloping AD curve → as aggregate prices rise, the consumption of domestic output (real GDP) falls (inverse relationship)

Aggregate demand increases → real GSP increases → right shift from aggregate demand

Aggregate demand decreases → real GSP decreases → left shift from aggregate demand

boost any or all components of AD

rein the components of aggregate demand

consumer spending, investment spending, government spending, and net exports

when households with more money are more likely to consume and save it

when firms increase investment if they believe the investment will be profitable

when government pushes money into the economy through various ways (direct increase in aggregate demand)

measure used to aggregate a country’s expenditures or GDP in an open economy

the idea that an initial change in spending will set off a spending chain that is magnified in the economy

how much people consume rather than save when there is a change in income

How much people save rather than consume when there is a change in income

dividing the change in consumption by dividing the change in disposable income

dividing the change in savings by dividing the change in disposable income

MPC + MPS = 1

an economic measure of the effect that a change in government spending and investment has on the Gross Domestic Product of a country

used to determine the maximum change in spending when the government either increases or decreases taxes

the relationship between the aggregated price level of all domestic output and the level of domestic output produced

the positive relationship between the level of domestic output produced and the aggregate price level of that output

the prices of goods and services are changing in their respective markets, but input prices have not been adjusted to those product market changes; SRAS curve is typically upward sloping

the economy is in a recession with low production meaning there are many unemployed resources

real GDP increases and approaches full employment, available resources are harder to find and input costs begin to rise

the economy is growing and approaching the nation’s productive capacity where firms cannot find unemployed units

If input prices fall economy-wide, the short-run AS curve increases without changing the level of full employment.

if “supply-side taxes” are lowered, short-run AS shifts to the right

when the regulation of industries restricts their ability to produce, the short-run AS likely increases

For a smaller nation or a large nation hit by an epic disaster, this could be a permanent decrease in the ability to produce

the number of goods and services that an economy is capable of producing with the full employment of resources

the input prices have enough time to fully adjust to market forces → all product and input markets are balanced = economy is at full employment (GDPf)

A larger labor force, a larger stock of capital, or more widely available natural resources can increase the level of full employment

Better technology raises the productivity of both capital and labor; A more highly trained or educated populace increases the productivity of the labor force

If the policy provides large incentives to quickly find a job, full-employment real GDP rises; If the government gives tax incentives to invest in capital or technology, GDPf rises.

it indicates economic growth

occurs when the quantity of real output demanded is equal to the quantity of real output supplied → graphically the intersection of aggregate demand and short run aggregate supply

the amount by which full-employment GDP exceeds equilibrium GDP

the amount by which equilibrium GDP exceeds full employment GDP

economy-wide phenomenon that affects the costs of firms and the position of the SRAS curve, either positively or negatively; cause of SRAS shifts

higher or lower energy prices

economy-wide input prices suddenly increase

deliberate changes in government spending and net tax collection affect economic output, unemployment, and the price level

real GDP is low and unemployment is high when the economy suffers a recession

when the economy operates beyond full employment, inflation becomes a problem, so the government might need to contract the economy

when price levels do not change, especially downward, with changes in AD

a type of fiscal policy that is already in place to offset the fluctuations or economic activity in our economy

less people are employed and less income is made for those unemployed families

income taxes with come into effect

describe income taxes that tax more if that household earns more income